Most startup disputes — equity battles, IP ownership conflicts, founder exits, broken partnerships — trace their origin to one failure: agreements that were not executed at formation. The pattern is consistent. Founders begin with goodwill and shared excitement. Legal documentation is deferred. The company grows, stakes increase, relationships strain, and the absence of a written framework becomes catastrophic. The Indian Contract Act, 1872 and the Companies Act, 2013 provide the statutory framework. The documentation must be built on top of it from day one.
Agreements Required at Formation
- Co-Founders Agreement — equity, roles, vesting, exit, decision-making
- IP Assignment Agreement — all pre-incorporation IP transferred to company
- Employment or Consulting Agreement — for early team and advisors
- Non-Disclosure Agreement — for employees, advisors and early commercial conversations
- Customised Articles of Association — incorporating SHA provisions directly
Why Formation Is the Only Correct Time
Agreements negotiated after a company is operational are negotiated from positions of unequal leverage. A founder who has contributed two years of work, built a product and assembled a team has very different negotiating power than one who joined six months ago. An investor who has committed capital has different priorities than one reviewing a term sheet. Formation is the one moment at which all founders stand on equal footing — before contribution differentials emerge and before equity has meaningful market value. It is also the moment at which stamp duty on the Co-Founders Agreement and Shareholders Agreement is lowest, since share value is nominal.
Agreements executed after problems arise are firefighting instruments, not legal architecture. They may resolve an immediate dispute but rarely provide the structural clarity that prevents the next one.
The Co-Founders Agreement
The Co-Founders Agreement is the foundational document of any multi-founder startup. It governs the relationship between founders before and after incorporation and addresses the questions that goodwill and verbal understanding cannot answer when circumstances change.
Equity Split and Rationale
The agreement must record the agreed equity split and — critically — the rationale for it. Rationale matters because disputes about equity commonly arise from differing recollections of what was agreed and why. A written record of contribution assumptions — who brings technology, who brings commercial relationships, who brings capital, whose network is being activated — anchors future conversations about whether the split remains equitable as circumstances evolve.
Roles and Decision-Making Authority
The agreement must specify who holds which operational authority. Common areas of conflict include hiring decisions above a salary threshold, expenditure above a defined amount, entering new business verticals, accepting investment, and pivoting the product. Without written allocation, every significant decision becomes a negotiation between founders. The agreement should specify which decisions require unanimous consent, which require majority, and which are delegated to a single founder by role.
Reverse Vesting
In Indian private companies, shares are issued at formation rather than granted over time. Reverse vesting is implemented contractually: a founder who exits before a defined period — typically four years with a one-year cliff — must transfer unvested shares back to the company or remaining founders at the original subscription price. Without this mechanism, a founder who leaves after six months retains the same equity stake as one who stays for five years. This is the single most damaging structural failure in Indian startup formation.
Good Leaver and Bad Leaver Provisions
Not all founder exits are equal. A good leaver — someone exiting due to illness, death or mutual agreement — typically retains vested shares and receives fair value treatment. A bad leaver — someone exiting in breach of the agreement, in violation of non-compete provisions, or following termination for cause — may be required to transfer shares at nominal value. These provisions must be defined with precision, including what constitutes cause and what valuation methodology applies.
Intellectual Property Ownership
The Co-Founders Agreement must confirm that all IP created by founders in connection with the company belongs to the company, not to the founders individually. This clause works in conjunction with the separate IP Assignment Agreement but should be stated expressly in the Co-Founders Agreement as a foundational principle.
IP Assignment — The Step Most Founders Skip
Under Section 17 of the Copyright Act, 1957, work created by an author in the course of employment belongs to the employer. For founders, however, pre-incorporation work is created before any employment relationship exists. IP created before the company is incorporated — code, designs, content, processes, algorithms — belongs to the founder individually as a matter of law. It does not belong to the company simply because the company is later built around it.
Investor due diligence routinely surfaces IP assignment gaps. A startup that cannot demonstrate clean ownership of its core technology, product or brand faces a material disclosure problem that can delay or derail funding. The fix after the fact — executing assignments retrospectively — is possible but attracts scrutiny about whether the transfer was genuinely at arm's length.
The IP Assignment Agreement must cover: all software, code, databases and algorithms created by each founder in connection with the company; all designs, brand assets and content; any patents, patent applications or patentable inventions; and all trade secrets and confidential know-how. The assignment must be executed on stamp paper of appropriate value under the relevant State Stamp Act, signed by the assigning founder and accepted by the company on incorporation. In Kerala, stamp duty on IP assignment agreements is computed on the consideration stated.
Employment and Consulting Agreements for Early Team
Every person who works for a startup — whether as an employee, advisor, contractor or consultant — must execute a written agreement before work begins. The agreement must include an IP assignment clause, a confidentiality obligation, and clarity on whether the person is an employee or independent contractor. This distinction matters significantly under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948 — misclassification creates retrospective statutory liability.
Early advisors — who often receive equity in exchange for guidance — must execute an Advisor Agreement specifying the equity grant, vesting schedule, the nature of services expected, and a clear IP assignment covering anything they develop in connection with the company. Advisor equity without a written agreement is a governance failure that institutional investors will not accept.
Non-Disclosure Agreement
A mutual NDA governs information exchanged between parties where both sides may disclose sensitive information — typically in commercial negotiations between startups and potential partners, vendors or customers. A one-way NDA governs disclosure by the startup to employees, advisors and contractors. Under the Indian Contract Act, 1872, a confidentiality obligation is enforceable as a contractual term. Unlike non-competes, confidentiality obligations are not subject to Section 27 restrictions and can be drafted without time limitation for trade secrets. The NDA must define what constitutes confidential information, the obligations of the receiving party, permitted disclosures, and consequences of breach — including whether liquidated damages under Section 74 of the Contract Act are stipulated.
Customising the Articles of Association
The Articles of Association (AoA) are the constitutional document of a company under the Companies Act, 2013. Table F of Schedule I to the Act provides a model set of Articles for companies limited by shares. Most startups adopt Table F with minimal modification — a significant mistake. A customised AoA can incorporate, at the constitutional level, provisions that would otherwise require a separate Shareholders Agreement: pre-emption rights on share transfers, right of first refusal, right of first offer, drag-along and tag-along rights, anti-dilution provisions, and reserved matters requiring supermajority approval. Provisions incorporated in the AoA are binding on all shareholders — present and future — by operation of Section 14 of the Companies Act. Provisions in a Shareholders Agreement bind only the signatories.
Dispute Resolution — Build the Architecture Before the Conflict
Every startup agreement — Co-Founders Agreement, Shareholders Agreement, AoA, IP Assignment, employment agreements — must contain a dispute resolution clause. For startup agreements, arbitration is strongly recommended over court litigation. Arbitration keeps disputes confidential, which protects commercial relationships, investor confidence and brand reputation. It produces resolution faster than Commercial Court proceedings. The clause must specify the seat of arbitration, the governing rules (institutional or ad hoc), the number of arbitrators, and the language of proceedings. Under Section 11 of the Arbitration and Conciliation Act, 1996, if the agreed appointment process fails, the Kerala High Court can appoint an arbitrator on application.
Frequently Asked Questions
A verbal agreement between co-founders may be enforceable under the Indian Contract Act, 1872 if it satisfies the basic requirements — offer, acceptance, consideration and free consent. However, enforcing it in practice is extremely difficult. Equity splits, vesting terms, IP ownership, exit rights and decision-making authority require written, signed documentation to be actionable. An oral agreement dissolves in a dispute. A written Co-Founders Agreement does not.
Section 27 of the Indian Contract Act, 1872 renders agreements in restraint of trade void as a general rule. However, Indian courts have distinguished between absolute restraints and partial restraints that are reasonable in scope, geography and duration. A non-compete during the term of the agreement and for a limited period after exit — typically twelve to twenty-four months — in a defined geography and industry, has a reasonable prospect of enforcement. Post-exit restraints that are overbroad will not be enforced and must be drafted with this limitation in mind.
IP created by a founder before the company is incorporated belongs to the founder individually, not to the company. If the company needs to own that IP — which it almost always does to raise funding or enter commercial agreements — the founder must execute a formal IP Assignment Agreement transferring all relevant IP to the company at or after incorporation. This is one of the most commonly neglected steps at formation and one of the most damaging to discover during investor due diligence.
In Indian private companies, shares are issued at formation rather than granted over time. Reverse vesting is a contractual mechanism — implemented through a Co-Founders Agreement or Shareholders Agreement — under which a founder who exits before a defined period must transfer their unvested shares back to the company or remaining founders at nominal value. It protects continuing founders from a scenario where a departing founder retains a full equity stake without ongoing contribution.
Yes. Arbitration is strongly recommended for startup agreements. It keeps disputes confidential — critical for startups where public litigation damages investor confidence. It also produces faster resolution than Commercial Court proceedings. The arbitration clause should specify the seat, institution or ad hoc process, number of arbitrators and governing law. For Kerala-based startups, the Kerala High Court Arbitration Centre is an available institutional option.